2023-06-14 05:32:19 ET
Summary
- TUI stock has declined following yet another rights issue this year.
- Fundamentals are on the mend, however, with the tourism industry gaining momentum post-COVID.
- With the stock now trading well below the theoretical ex-rights price, likely a result of technical selling pressure, there is compelling value here.
TUI AG (TUIFF) has suffered a pummeling this year, as its rights issue in late March triggered an alarming selloff - well beyond the implied post-rights dilution factor. Technical factors are likely at play - the >30% equity owned by sanctioned Russian oligarch Alexei Mordashov (via Unifirm and Severgroup), who has not been granted any rights, likely magnified the perceived dilution, along with the outsized retail burden from Mordashov's exclusion. TUI's record of equity dilution (the last EUR1.1bn rights issue was in late 2021) doesn't inspire confidence either. But having successfully raised EUR1.8bn of new capital (EUR750m to pay back COVID-related government aid and the remainder to de-lever), the TUI balance sheet overhang has largely been cleared. And as Q2 showed, TUI's booking momentum is shaping up well despite the cost-of-living challenges in its key European markets. With the mid-term targets unchanged despite a planned capacity expansion for next year, the company may be poised for positive revisions ahead. The stock trades well below the theoretical ex-rights price ((TERP)) and at a discounted fwd EV/EBITDA of 2-3x (3x trailing), presenting a compelling entry point.
Digging into the Steep Discount Post-Rights
Having completed a massive >EUR1bn rights issue in 2021, TUI launched yet another exercise this year, raising EUR1.8bn of gross proceeds at an 8:3 subscription ratio (i.e., eight new shares for every three existing shares). The discounted subscription price of EUR5.55/share implied a TERP of EUR9.13/share and a 0.5807 dilution factor. The company has earmarked the gross proceeds for the repayment of ~EUR420m of convertibles owed to the state ('Silent Participation I'), along with ~EUR59m of outstanding 2020/2026 Bonds with Warrants. Including accrued interest, the total repayment to the state amounted to a market value of ~EUR750m, with the remainder allocated to leverage reduction (~3x target per management's guidance).
While the removal of government involvement in TUI as well as the de-levered balance sheet, were steps in the right direction, it comes with significant costs. Since the TUI subscription rights began trading, the combined market value of the shares and rights have remained at a steep discount to the TERP - despite being syndicated and fully underwritten by major banks. Perception likely played a part, as TUI's fundraising history (most recently the two equity raises in 2021) may have disincentivized subscription.
The role of sanctioned Russian shareholder Mordashov, whose 30.9% stake pre-rights has been diluted to ~11% post-rights (note he has not been granted any rights), may also have influenced the outcome. While Mordashov's exclusion led to an indirect wealth transfer to TUI's remaining shareholders, it also entailed outsized retail participation (>EUR1bn burden assuming full exercise), which may have increased selling pressure on the rights. With the stock now down to EUR6.62, a ~27% discount to the TERP, despite improving fundamentals (per its trading update ), I suspect TUI may have been penalized too harshly for its rights issue.
Q2 Update Indicates a Fundamental Improvement is Underway
TUI followed up its rights issue with a positive set of results in fiscal Q2, showing better than expected underlying EBIT/EBITDA losses (i.e., adjusted for one-offs). With key P&L metrics already inching closer toward 2019 levels and the upcoming summer season shaping up strongly (bookings +13% YoY and ~96% pre-COVID), TUI looks poised for more beat-and-raise reports ahead. Beyond summer 2023, management has also committed to capacity expansion in the UK for summer 2024, with 1.1m extra seats and additional aircraft operating from >20 regional airports. Also underpinning investor optimism is the updated FY23 underlying EBIT guidance ("on track to deliver a significant increase"), presenting upside to its unchanged mid-term targets.
TUI's strong trading update echoed the upbeat commentary throughout the European travel industry. Low-cost carrier Jet2 ( OTCPK:JTTTY ), for instance, recently cited "encouraging" forward booking numbers at its latest trading update , along with a +0.7%pt rise in load factors. Also notable was the +5%pts increase in takeup of package holidays (note Jet2 is also the UK's largest tour operator) despite the cost-of-living crisis. A more resilient tour operating industry in the UK, a key TUI market, bodes well for the strong booking momentum continuing post-COVID. And with the company also better equipped to navigate price discounting post-implementation of its 'asset-right' strategy, which allows for more flexible capacity allocation, I wouldn't be surprised to see margins surprise to the upside as well. Over the mid to long-term, the margin accretive digital platform rollout will be worth monitoring, as well as progress on the expansion of its modern hotel brand 'TUI BLUE' across new geographies.
Unfairly Penalized Post-Rights Issue
TUI shareholders have had a rough go at it in recent years, with the massive dilution following this year's rights issue triggering an alarming stock price decline. While a discounted valuation is warranted, given the extent of its fundraising, I think the stock is likely technically oversold at this point. Given its biggest shareholder, Mordashov, has been sanctioned and, thus, could not participate in the rights, this left an outsized fundraising burden on retail, likely magnifying the near-term dilutive impact. Perception issues likely played a part as well, though the current valuation of 2-3x fwd EV/EBITDA (stock price well below TERP) seems too cheap, particularly with the EUR1.8bn of new capital significantly de-levering the balance sheet. Looking ahead, progress on the post-COVID recovery momentum through fiscal H2 will be key to a re-rating from here.
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TUI AG: Unfairly Penalized Post-Rights Issue